In a commercial property transaction, the representations and warranties schedule is where the seller’s knowledge of the property is formally recorded and where the buyer’s post-closing remedies are established. The negotiation of that schedule warrants close attention from both sides.
Commercial real estate transactions in Ontario are built on information asymmetry. The seller knows the property. The buyer is acquiring it. Due diligence narrows the gap between what each party knows, but it cannot close it entirely. Some aspects of a property’s condition, history, and legal status are accessible only through the seller’s disclosure. Others are matters where the seller’s representations provide the buyer with a contractual basis for recourse if the disclosed position turns out to be inaccurate.
Representations and warranties are the mechanism through which that contractual basis is established. They are statements of fact made by the seller as at the date of signing and, in most well-drafted agreements, as at the date of closing. If a representation turns out to be false, the buyer has a claim. The scope of that claim, the period within which it can be brought, and the circumstances under which it is available are all determined by how the representations and warranties provisions are drafted and negotiated.
This article examines the structure of representations and warranties in Ontario commercial purchase agreements, the key negotiating positions of buyers and sellers, and the specific provisions that most frequently become points of contention. It is aimed at parties and their advisors who are in or approaching a transaction and want to understand the landscape before the negotiation begins.
Representations and Warranties Distinguished
In common usage, and increasingly in commercial practice, the terms representation and warranty are used interchangeably. They are, however, technically distinct concepts with different legal consequences.
A representation is a statement of past or present fact that induces a party to enter into a contract. At common law, a false representation that induces a contract may give the innocent party the right to rescind the agreement and claim damages for the loss suffered as a result of reliance on the misrepresentation. The relevant legal framework in Ontario draws from both contract law and the law of misrepresentation, and the remedies available depend on whether the misrepresentation was innocent, negligent, or fraudulent.
A warranty is a contractual promise that a stated fact is true. A breach of warranty gives the innocent party a claim for damages, but does not automatically give rise to a right to rescind the agreement unless the breach is sufficiently fundamental. In practice, the distinction matters most when a buyer discovers a problem after closing and needs to determine whether rescission remains available or whether the remedy is limited to damages.
Most commercial purchase agreements in Ontario treat representations and warranties as a unified category and address them in a single schedule. The practical focus in negotiation is less on the technical distinction between the two concepts and more on the substantive content of what is being represented, the qualifications attached to those representations, and the remedial framework that applies if they prove false.
The Seller’s Position: Knowledge, Qualification, and Limitation
Sellers approach representations and warranties from a consistent set of objectives: to limit the scope of what is being represented, to qualify representations by reference to actual knowledge rather than constructive knowledge, to exclude matters discoverable through due diligence, and to limit the period and quantum of post-closing liability.
Knowledge Qualifiers
The most common form of seller limitation is the knowledge qualifier. A seller who represents that “to the best of the seller’s knowledge” a property has no outstanding work orders is in a materially different position from a seller who represents that there are no outstanding work orders, full stop. The knowledge-qualified representation limits the seller’s liability to matters within actual knowledge. An undisclosed defect that the seller genuinely was not aware of does not breach a knowledge-qualified representation.
The scope of the knowledge qualifier itself is frequently negotiated. Buyers seek a definition that captures not only what the seller actually knows but what the seller would have known upon reasonable inquiry. This is sometimes described as a constructive knowledge standard. Sellers resist that formulation, preferring a pure actual knowledge standard that does not impose an obligation to investigate.
A further question is whose knowledge counts. For corporate sellers, the definition of the seller’s knowledge typically identifies specific individuals whose knowledge is attributed to the seller, usually the officers or principals most directly involved with the property. Buyers seek a broad definition; sellers prefer a narrow one.
Due Diligence Carve-Outs
Sellers frequently seek to exclude from the representations and warranties any matters that the buyer could have discovered through the exercise of reasonable due diligence. The logic is that a buyer who has access to the relevant information and fails to discover it through its own investigation should not be entitled to claim on a representation for a matter it could have identified independently.
The enforceability and scope of due diligence carve-outs is a genuine area of contention. Buyers argue, with some force, that the purpose of representations and warranties is precisely to provide a remedy for matters that due diligence does not or cannot reveal, including matters within the seller’s exclusive knowledge, latent defects, and inaccuracies in disclosed documents. A carve-out broad enough to exclude anything discoverable through reasonable diligence significantly undermines the protective function of the representations and warranties package.
In practice, the negotiated outcome often distinguishes between matters that were actually disclosed to the buyer during due diligence and matters that theoretically could have been discovered. A buyer who received a document during due diligence that disclosed the relevant fact is in a weaker position to claim on a related representation than a buyer who could only have discovered the issue through an independent investigation that was not reasonably required by the circumstances.
Materiality Thresholds
Sellers often seek to qualify representations by limiting their application to material matters, so that minor or technical inaccuracies do not give rise to claims. A representation that there are no material defaults under existing leases excludes the possibility of a claim based on a trivial breach by a tenant with no financial consequence. A representation that the property is in compliance with all applicable laws in all material respects excludes technical non-compliance that does not affect the property’s value or use.
Materiality thresholds are a reasonable accommodation in principle. The question in any specific negotiation is how materiality is defined and who determines whether a given matter meets the threshold. Where the agreement leaves materiality undefined, the assessment defaults to the courts, which apply an objective standard that may not align with what either party anticipated. Sophisticated parties define materiality by reference to a specific dollar threshold, a percentage of the purchase price, or a qualitative description that provides sufficient certainty for both sides.
The Buyer’s Position: Scope, Specificity, and Survival
Buyers approach representations and warranties from the opposite set of objectives: to maximize the scope of what the seller is warranting, to minimize the qualifications attached to those warranties, and to ensure that the remedial framework provides a meaningful avenue of recourse for a reasonable period after closing.
Scope of Coverage
A comprehensive representations and warranties schedule in an Ontario commercial purchase agreement will typically address, at minimum, the following categories of matters:
- Title: the seller has good and marketable title to the property, free from encumbrances other than those disclosed.
- Legal compliance: the property and its current use comply with all applicable laws, by-laws, and regulations, including zoning and land use requirements.
- Environmental: the seller has no knowledge of contamination, environmental orders, or outstanding regulatory requirements under the Environmental Protection Act.
- Leases: the rent roll and disclosed leases accurately reflect all tenancies, there are no undisclosed amendments or side agreements, and there are no material defaults by the landlord or any tenant.
- Litigation: there is no pending or threatened litigation affecting the property or any tenancy.
- Work orders: there are no outstanding work orders, building code violations, or property standards orders.
- Service contracts: all material service contracts and operational agreements have been disclosed, and none contain change of control provisions triggered by the transaction.
- Financial information: any operating statements, rent rolls, or financial information provided to the buyer are accurate and complete in all material respects.
The breadth of this list is itself a negotiating variable. Sellers in strong market positions or with significant bargaining leverage may resist representations in one or more of these categories, particularly environmental representations and representations about the accuracy of financial information. The buyer’s response to the absence of specific representations must be reflected in the due diligence program, the conditions, and the pricing.
Survival Periods
Representations and warranties in a commercial purchase agreement survive closing for a negotiated period, after which no claims can be brought. The survival period determines how long the buyer has to discover and pursue a breach.
In Ontario commercial real estate transactions, survival periods for general representations and warranties typically range from twelve to twenty-four months from the date of closing. Environmental representations, which involve risks that may not become apparent for years, are frequently given longer survival periods, sometimes extending to the applicable limitation period under the Limitations Act, 2002. Tax-related representations typically survive until the relevant tax assessment periods have expired.
Sellers seek short survival periods that provide certainty of finality. Buyers seek longer periods that reflect the realistic timeline for discovering problems with the acquired property. The negotiated outcome is typically a tiered structure that distinguishes between general representations, which survive for a defined period, and specific representations addressing matters of heightened risk, which survive longer.
A representation that has expired is not actionable regardless of how serious the breach. A buyer who discovers a material misrepresentation after the survival period has elapsed has no contractual remedy, even if the loss is substantial. For buyers, the survival period is therefore not an abstract drafting point but a direct determinant of the practical value of the representations being given.
Indemnification Framework
The representations and warranties provisions interact closely with the indemnification provisions of the purchase agreement. Where a representation proves false, the buyer’s remedy is typically a claim under the indemnification provisions, which set out the mechanics of how losses are calculated, the minimum claim threshold below which claims are not actionable (sometimes called a deductible or basket), and the maximum aggregate liability of the seller for indemnification claims (the cap).
The basket and cap are among the most heavily negotiated provisions in any commercial purchase agreement. The basket sets a floor: the seller is only liable for claims that, individually or in aggregate, exceed the basket amount. A basket may operate as a deductible (only amounts above the basket are recoverable) or as a threshold (once the threshold is crossed, the entire amount is recoverable). The cap limits the seller’s aggregate exposure, typically expressed as a percentage of the purchase price.
For buyers, a high basket combined with a low cap significantly limits the practical utility of the representations and warranties, even where the representations themselves are comprehensive. A seller who knows that a buyer cannot bring a claim below a substantial basket and that aggregate liability is capped at a small fraction of the purchase price has less incentive to disclose fully than one facing unlimited exposure. Calibrating these provisions to the specific risk profile of the transaction is one of the more consequential tasks in commercial purchase agreement negotiation.
The Interaction with Due Diligence
Representations and warranties and due diligence are complementary risk management tools, not alternatives. This distinction is worth emphasizing because the relationship between the two is sometimes misunderstood.
Due diligence investigates what can be discovered independently. Representations and warranties address what can only be known through the seller’s disclosure, what the seller is affirming about the accuracy of information it has provided, and what recourse the buyer has if that affirmation proves false. A thorough due diligence program reduces the likelihood of a claim under the representations and warranties but does not eliminate the need for them.
There is also a practical interaction between the due diligence findings and the representations the seller will agree to give. A seller who is aware of a problem with the property will seek to disclose it through a schedule to the representations and warranties, thereby qualifying the representation and eliminating the buyer’s claim in respect of that specific matter. A buyer reviewing the disclosure schedule must assess whether the disclosed matters are adequately reflected in the purchase price and whether additional protections, such as a price holdback or specific indemnity, are required.
Where due diligence reveals matters that the seller has not voluntarily disclosed, those findings strengthen the buyer’s negotiating position on the representations and warranties. A buyer who has independently identified an environmental concern, a lease default, or a zoning non-compliance can insist on specific representations addressing that matter, or can condition the transaction on satisfactory resolution of the identified issue before proceeding.
For a comprehensive treatment of the due diligence process in Ontario commercial acquisitions, see our dedicated article on that topic.
Bring Down and Date-Down Provisions
A representation made at the time of signing may be accurate then but inaccurate by the time of closing. Bring-down provisions address this by requiring the seller to confirm, as a condition of the buyer’s obligation to close, that the representations remain true as at the closing date. In effect, the seller’s representations are made twice: once at signing and once at closing.
Bring-down conditions are standard in sophisticated commercial transactions and provide important protection against material changes in the property’s status between signing and closing. A seller who discovers that a major tenant has given notice of default, that a work order has been issued, or that litigation has been commenced after signing but before closing must disclose that development. If the bring-down condition cannot be satisfied, the buyer has grounds to decline to close without being in breach.
The bring-down standard is itself negotiated. Buyers typically seek a condition that the representations be true in all material respects as at closing. Sellers sometimes accept a higher threshold, such as requiring that a breach be sufficiently material to have a specified financial impact before the buyer can refuse to close. The appropriate standard depends on the risk profile of the specific transaction and the parties’ respective negotiating positions.
Entering a Commercial Transaction in Ontario? Speak With Our Team.
At Goldstein & Grubner LLP, our commercial real estate lawyers negotiate representations and warranties provisions in commercial purchase agreements for buyers and sellers across Ontario. We advise on the appropriate scope of representations for each transaction, negotiate qualification and limitation provisions, and structure the indemnification framework to reflect the actual risk profile of the acquisition.
Contact our office to discuss your transaction.
This article is intended for informational purposes only and does not constitute legal advice. The appropriate scope of due diligence varies with each transaction. For advice specific to your acquisition, please consult a qualified commercial real estate lawyer.
